The Emergence of Water Hedge Funds

(An interesting post on water hedge funds)
Commodity hedge funds have been popular for some time. Ever since the Enron fiasco, more and more hedge funds have been looking for new ways to make commodity and other types of deals. Real estate hedge funds either got clobbered or did fantastically during the housing crisis of 2007-8. Now, smart futurists are warming up to water as the next great commodity play. Not so much water, as clean water. Traders look at the spread between the price of oil (about $4 a gallon) and clean water (about $.01 a gallon) and know these spreads will converge over time as the population grows and the need for food explodes.

There are many places in the world, such as India, where clean water can be quite scare. It is only a matter of time before governments step in and demand access to more clean water. If hedge funds are correct, these governments will get their water, but for a price dictated by international water utilities. The first groups to be hit by higher water prices will be farmers, the users of 70 percent of the world’s tap water. There is no way around the economic rules of the market: as a needed commodity becomes scarcer, its price must rise.

The other feature of water is that it price-inelastic – its consumption is not curtailed by higher prices. Thirsty people will pay anything for water, and hedge funds know it. So hedge funds are scouring the world looking for water investments that will pay off over time. Already, municipal water rates are climbing at double digit rates in such venues as Canada, South Africa and the U.S. Because of various subsidy programs, European countries have water rates that range from less than a dollar per cubic meter to over $2.25. If it weren’t for government subsidies, it’s a good bet that farmers throughout the world would be staging water riots.

Visionary billionaires like Texas oil man T. Boone Pickens were ahead of the curve when in 1999 he founded Mesa Water to provide water to parched communities for a handsome price. Water is also important for producing corn for ethanol, another area of concern to Mr. Pickens. Water prices will track corn prices, both of which will be tied to gasoline prices. The higher the price for a tank of gas, the more pressure there will be to develop ethanol substitutes – which need water, of course. Seeing this trend, Power Shares has created a Water Resources Portfolio that contains a collection of stocks of companies involved in water production, treatment, and distribution. Hedge funds can be expected to exploit price differences in different markets for tap water, and if they do so, big profits should follow.